Officers believe the bomb, hidden in a Transit van, was to have been detonated on Saturday night in the West End of London.
But sources say that the vehicle had been under surveillance for several weeks after detectives made a breakthrough in the search for the terrorists who bombed the Baltic Exchange in the City of London in April.
At least three men were being questioned at Paddington Green top-security police station last night as a result of the raids in Cheshunt, Hertfordshire, and Hanwell, west London. There were unconfirmed reports late last night that a third address, in Southall, near Hanwell, was being searched as part of the operation.
It is not known whether there is a direct link between the breakthrough in the Baltic Exchange inquiry and the arrests yesterday. But in mid-July detectives said privately that they had identified at least one of the bombers after finding a fingerprint on a pounds 50 note used to buy the van in which the City bomb was hidden.
A van was also used in the bombing of Staples Corner, one of north London's busiest junctions, four hours after the detonation of the City bomb, which killed three people and injured more than 90.
Sources say that a second van and a Toyota Celica were seized in the latest raids, but a third van and at least four other suspects are being sought. It is understood the third van was also under surveillance, but officers lost track of it.
Because the manhunt was still under way, neither Scotland Yard, nor the City of London Police, who are believed to have been involved in the operation, would discuss the case.
Commander George Churchill-Coleman, head of the anti-terrorist branch, is expected to give further details today.
About 60 officers were involved in the raids, which began late on Tuesday and continued into yesterday morning.
It is understood weapons and bomb-making equipment were taken away from a council maisonette in Cheshunt which is normally occupied by an Irish couple and their three children. One man was arrested there.
Two more men were held in a second raid, at an address in Hanwell from which the Toyota was taken. They were held by members of Scotland Yard's PT17 firearms unit, armed with Heckler and Kock sub-machine guns.
The Press Association last night quoted southern Irish sources as saying the men came from Dublin and the borderside counties of Monaghan and Cavan, but neither the Garda nor Scotland Yard would provide confirmation.
Yvonne Ireland, who lives near the Cheshunt address, said: 'There were loads and loads of police everywhere with guns and dogs. The policeman we spoke to said there were a lot of guns and a lot of bomb-making equipment there.'
Susan Piddington, 25, another neighbour, said she saw armed police outside her door at about 9pm on Tuesday.
'My boyfriend opened the front door and there was a shotgun pointed at his face,' she said. 'He was told to get back in quickly.'Reuse content